Today we will be taking a look at some more Debt Myths with Dave Ramsey. The myths he discusses in his Total Money Makeover are so common these days that nearly everyone takes them for fact. But, once you think about it, do the math, etc… you will see that they are all foolish! Enjoy!

Myth: Car payments are a way of life. You will always have one.

Truth. The average millionaire stays away from car payments and drives a reliable used car. Hint: that is how they became a millionaire! Taking on a car payment is one of the worst things you can do financially. A car payment is most peoples largest bill each month, besides their mortgage / rent.

Dave explains it like this. The average car payment is $378 over 55 months. Once this car is paid off, most people trade it in for a new car because they “need” it. What a waste of money! If you keep this $378 car payment throughout your normal working life (which is what most people do these days), from age 25 to 65, and invest it in a good growth stock mutual fund at 12% interest, you would have $4,447,084.01 at retirement. As Dave says, “HOPE YOU LIKE THE CAR!”.

So, what should you do? If you put $378 in a cookie jar for just 10 months, you would have almost $4,000 in cash to buy a used car. Sure, you aren’t expected to drive a 4k car the rest of your life. What you do is drive this car and save more money then trade up to an $8,000 car. After only 2.5 years, you will have a 12k PAID FOR car.

Taking on car payments because everyone else does it is not smart. Will your friends laugh at you because you drive a junk car for a bit? Sure. Who cares! If you are that superficial that you care sooo much about what other people think of you, well, your issues are deeper than just finances. You have to make a decision about looking good vs. being good. Looking good is when your broke friends are impressed by what you drive. Being good is having more money than they do.

Myth: Leasing a car is what sophisticated people do. You should lease things that go down in value and take the tax advantage.

Truth. Take a moment and think about it, and you will see that leasing a car is the most expensive way to operate a vehicle. Here is why.

The average interest rate is 14%. If you lease a car with a value of $22,000 for 3 years… and when you turn it in at the end of that lease, the car is worth $10,000. Someone has to cover that loss. You know that the auto giants aren’t going to put together a plan to lose money.

According to Smart Money Magazine, the average new car purchase for cash makes the dealer an $82 profit. When the dealer can get you to finance with them, they make an average of $775 per car. But, if they can get you to lease the car, the dealer can sell it to the bank or finance company for $1,300.

Car dealers make their money in the finance office and the shop, not in the sale of cars.

Myth: You can get a good deal on a new car at 0% interest.

Truth: A new car loses 60% of its value in the first four years. That isn’t 0%!

Dave lays it out on the line, simple and clear. “You can’t afford a new car unless you are a millionaire and can therefore afford to lose thousands of dollars all in the name of the neat, new car smell.” A good used car that is less than three years old is just as reliable as a new car.

A new $28,000 car will lose about $17,000 of value in the first four years that you own it. If you calculate that out, it is nearly $100 per week in lost value. Can you afford to throw away $100 per week? Many people do, and don’t even realize it.

The average millionaire drives a two year old car with no payments - they paid cash. Some people want a new car for a warranty. $17,000 for a four year warranty? You could rebuild the car twice for that price. Insane.

Myth: You should get a credit card to build your credit.

Truth: You won’t use credit with your Total Money Makeover, except maybe for a mortgage… and you don’t need a credit card for that.

This is one of my favorite myths. This myth means you have to get debt so we can get more debt because debt is how we buy stuff. News flash - cash buys stuff better than debt! Before Dave, when I heard about this plan, I thought it was silly and could never work. Ha, talk about me being wrong!

I hear you asking now, how do I get a home mortgage without credit? Simple - find a mortgage company that does manual underwriting, which means they look at your financial past and determine if you are responsible that way, the “old fashioned” way and don’t base it off a silly FICO (aka I LOVE DEBT) score. Through the manual underwriting, you can get a mortgage if: you have paid your landlord early or on time for two years - you have been in the same career field for two years - you have a good down payment - you have no other credit, good or bad - you are not trying to take a loan that is too big. Don’t let anyone tell you to go into debt to get a mortgage. As Dave says, “that is a lie!”.

As for “building credit” for other purposes, leave that to the losers.

Myth: You need a credit card to rent a car, check into a hotel or buy online.

Truth: A debit card will do all of that. The VISA debit card linked to your checking account gives you the ability to do virtually everything the credit card can do. Think the debit card has more risk than the credit card? Wrong! VISA’s regulations require the member’s bank to offer the exact same protections from theft or fraud.

Myth: If you pay off your credit card each month, you get the free use of someone else’s money.

Truth: 60% of people don’t pay off their cards every month. Card companies put out all kinds of bait to get you to use their card: a discount at the register, airline miles, a free hat, etc. Think about it. Why do they try so hard to get you as a member? The answer is, you LOSE and they WIN. You won’t wear the hat, and consumer reports says 75% of the airline miles go unused.

Even if you do pay off your balance each month, you still lose. A study by Dunn and Bradstreet shows that users spend 12-18% more with plastic than cash. It hurts when you spend cash, therefore, you spend less.

So, what do rich people do? THEY DON’T GET RICH WITH FREE HATS, AIRLINE MILES AND THE USE OF SOMEONE ELSE’S MONEY! What do broke people do? They use credit cards. 69% of bankruptcy filers say credit cards were to blame for them filing.

Before Dave gets into his 7 Baby Steps to getting out of debt and building wealth, he covers several “debt myths” that most people have been lead to believe are fact. People can’t imagine being without debt… a car without a payment, a house without a mortgage, a student without a loan and credit without a card. Just imagine what you could do with all of that extra income each month! There are a good bit of myths covered in the Total Money Makeover, so I will split them up into two separate posts. So yeah, here we go with the first batch.

Myth: Debt is a tool and should be used to create prosperity.

Truth: Debt adds considerable risk, most often does not bring prosperity and isn’t used by wealthy people as much as we are led to believe. Over time, debt brings on enough risk to offset any advantage that could be gained through leverage of debt.

Dave gives us a great analogy here. Have you ever seen that kid in the store pitching a total fit because he/she “wants something NOW”? Our culture has taught us to be just like this 3-year-old, to live for the NOW… and we can get it, if we are willing to go into debt. Just remember, there is no shortcut to any place worth going.

Another good analogy is this: if you want to be debt free and build wealth, you must find common things, common grounds with those who have made it. If you want to be skinny, study skinny people. If you want to be rich, do what lots of rich people do. When surveyed, 75% of the top 400 richest people from the Forbes 400 said the best way to build wealth is to become and stay debt free. These people lived on less than they made and didn’t buy things unless they had cash!

Myth: If I loan money to a friend or relative, I am helping them.

Truth: If I loan money to a friend or relative, the relationship will be strained or destroyed. Think about it… the only type of relationship that would exist would be where one person is the “master” and one person is the “slave”. Sure, that person might get upset when you decline to loan them money, but they will get over it. Financial debts often ruin life-long friendships and relationships.

Have you ever loaned someone money, only to have them not pay you back on time… or at all? I have. I let a friend borrow $13 in high school and it took him SEVEN months to repay me. He had the money within a week, but he just refused to pay me and would rather spend the money on himself. Not cool.

It is fine if you give money to a friend in need, granted you have the extra money, but loaning them money will only lead to bad things. Don’t do it.

Myth: By co-signing a loan, I am helping a friend or relative.

Truth: Be ready to repay that loan. The bank isn’t stupid; they wanted a co-signer for a reason, and that reason being that there is a very high chance that the person won’t pay. People co-sign on loans simply out of emotion and don’t put any logical thought into it. Much like the previous myth, it will lead to a damaged relationship, damaged credit and money out of your pocket. Don’t do it.

Myth: Cash advance, payday loans, rent-to-own, title pawning and tote-the-note car lots are needed to help lower income people get ahead.

Truth: These rip-off examples of predatory lending are designed to take advantage of low income people and benefit only the owners of these companies making the loan. If you have ever noticed, these places are only found in low-income sections of town… that is because wealthy people aren’t dumb enough to fall for this.

Let’s take a look at some examples. First, the rent-to-own store. People purchase items at these places because they “possibly can’t afford to buy” whatever item it is they want. They look at how much a week is being asked and think “I can afford this”. Wrong!

Rent-to-own places have effective interest rates of over 1,800%! Take the average washer and dryer set, which would cost you $20 per week… for 90 weeks. Do the math, folks, that is $1,800 for the set. If you had saved $20 per week for 10 weeks, you could have bought the scratch-and-dent model off the show floor of that same rent-to-own store for $200, or bought a used set off Craigslist.

Lower income people will remain at the bottom if they fall for these shady practices.

Myth: 90-days same as cash equals using other people’s money for free.

Truth: It is not the same as cash. This is silly marketing that people fall for. We buy things we don’t need, with money we don’t have, to impress people we don’t really like. Think about that… it’s exactly true. Why else do women spend so much money on makeup, plastic surgery, etc.? Why do teens spend so much on name-brand clothes? Why do we buy the latest and greatest tech gadgets? It’s all to impress people.

Here are two reasons that Dave gives to prove that 90-days is NOT the same as cash. First, if you will flash cash in front of a store manager who has a sales quota to meet, you will likely get a discount. If you don’t, go to the competitor.

Second, most people don’t pay off the debt in the allotted time. Nationally, 88% of these types of debt don’t convert and you are charged an interest rate of 24-38%, and they back charge you to the date of purchase.

If that red-faced kid, “I WANT IT, I WANT IT NOW”, rules your life, you will stay broke!

More debt myths busted in my next Dave Ramsey update!

I mentioned Dave Ramesy’s Total Money Makeover in a recent post, and true to my word, I am going to outline the entire plan here on my blog, step by step. Before jumping head-first into the 7 Baby Steps, we need to cover a few things.

The Challenge.

As mentioned in the previous post, the Total Money Makeover is a challenge… and the challenge is YOU. You are the king of your future, and it is very important to realize that from the get-go. Financial success is 80% behavior and 20% head knowledge. Most people know the “right” thing to do, they simply don’t do it. Why? Because we live in a world of instant gratification; when you want something, you want it NOW. Who wants to wait to get something that you can have now with credit? It’s all about discipline and simply “growing up”.

Denial.

90% of problem solving is realizing that you do indeed have a problem. Once you admit that you have a problem with money, you are well on your way to rectifying that issue. If you are the type of person that is “never wrong” or always puts the blame on someone else… well, grow up, get over it! Nobody is perfect, including you. Accept responsibility for your actions, both previous and current.

Being Financially Fat.

70% of Americans live paycheck to paycheck. Dave describes many people as being “financially fat”. Much like people get fat, you can get fat with your spending and expenses. When you are physically fat, it’s hard to be in denial. When you are financially fat, you can fake it, and look good… for a while.

The sad thing in today’s world is that you don’t even have to be financially fat to have a problem. You can be financially mediocre, “financially flabby”, and still be average. This is considered “okay” by many people’s standards. I am “getting by”, “surviving”… so nothing is wrong. Not true! If you are fine with just making ends meet, good for you, but if you really want to make something of your life and HAVE something, you need to make a change.

Once you realize you are financially fat, in debt and really have that desire to change, it’s time to start the next process, which I will cover in my next Total Money Makeover post.

My friend Josh has been a big fan of Dave Ramsey for a while now. I have heard Dave’s radio show a few times while hanging out with Josh, but only for a short period each time. This weekend, however, I hung out at Josh’s place and watched a couple of Dave’s television shows and now… I’m hooked!

Who is Dave Ramsey and What is He All About?

Dave is a financial expert that helps people get out of debt, plain and simple. Dave has “been there, done that”. By age 26, he was a self-made millionaire in the real estate industry. But, like most everyone these days, Dave had debt… so much, in fact, that within 2 1/2 years, he was flat broke.

After losing everything, Dave vowed to learn everything he could about money: how it “really” worked, how to control it and how to handle it. He read everything imaginable, interviewed “older rich people” that had made a ton of money and still had it. So, what did he discover?

It All Starts With You.

That’s right, you, the person you see in the mirror every day. You are the reason you are in debt and have money problems, easy as that. Dave realized that if he could learn to control himself financially, he would “win with money”.

Dave went back to what he knew, the real estate business. In 1988, he formed a company to counsel people who had financial issues. Dave then wrote a book, Financial Peace, which he sold out of his car. With the help of a friend, he started a local radio show called “The Money Game”, which is now nationally known as The Dave Ramsey Show.

My Total Money Makeover.

Josh let me borrow his copy of My Total Money Makeover audio book, which I listened to in full the first day I had it. I really enjoy listening to Dave because he is direct, to-the-point. He doesn’t beat around the bush about issues. He will tell you straight up if you are making a stupid financial decision and explain exactly why.

The My Total Money Makeover plan won’t be fun. It will be tough and you will make sacrifices - Dave puts this right out on the table from the beginning.

Remember, it all starts with you. It’s no different than someone trying to quit smoking or doing drugs: you have to want to change. If you are sick and tired of being sick and tired, this is the program for you!

I have decided to take Dave up on the My Total Money Makeover program. Before listening to this book, I didn’t really consider myself “in debt”… but, that is a lie. I owe a small fortune in student loans (what a waste of time that was) and have a few credit cards with high balances… and a smaller debt that I owe the school directly. Let’s just say that I could buy a pretty nice, brand new car with all of the money that I currently owe.

7 Baby Steps.

My Total Money Makeover consists of 7 Baby Steps that you use to get out of debt and begin building wealth. I will be making many more blog posts on My Total Money Makeover, covering each of these steps in detail along with my story and progress thus far.

Are you In Debt?

A simple question… are you in debt? Besides a mortgage on a home (if you own one), do you have any debt? And I mean ANY? Any nagging credit card debt, car notes, anything? Do you consider your debt a big issue, or something that you can pay off quickly?

Let’s hear it!